Section 43B in Income Tax Act

Whether you’re an experienced business owner or just getting started, knowing about Section 43B is key to managing your tax responsibilities. This part of the Income Tax Act in India is important for businesses of all sizes as it affects how specific expenses are considered for tax purposes. 

Understanding Section 43B is crucial for following tax rules and making smart financial choices. In this article, learn about Section 43B, payments exceptions under taxation.

Also Read The Ultimate Guide to Income Tax

What is Section 43B?

Section 43B of the Income Tax Act of 1961 states that certain expenses can be deducted only when the assessee actually pays them. These expenses include tax, cess, duty, interest, fee, leave encashment, bonus, employee’s benefit fund contribution, commission, and payment to Indian Railways. 

The deduction is permissible either in the year of payment or before the due date of filing the income return for that year, whichever comes first. However, the amount payable to Micro and Small Enterprises qualifies for deduction in the same year if paid within the stipulated timeframe defined by The MSME Act. 

For instance, let’s consider Mr Kumar, the proprietor of a manufacturing company. He procured raw materials worth ₹1,00,000 in March 2022, a necessary expense for his production activities. Although the purchase was made in March, the actual payment was made in May 2022. Mr Kumar can claim a deduction for the financial year ending March 2022 by providing proof of this expense while filing his return in September 2022. If he settles the payment in October 2022, the deduction under Section 43B would not be applicable for the financial year ending March 2022, as the payment deadline has passed. Instead, he can claim the deduction for the financial year ending March 2023. 

Expenses Covered Under Section 43B

Section 43B allows certain expenses only as follows:

• Employee Welfare Funds: Expenses made by the employer towards the employee welfare, such as PF and Employees’ State Insurance (ESI) funds and other welfare schemes, can be claimed as a deduction under Section 43B. However, the employer must ensure that the payments are made before the due dates. 
• Bonus and commission: Any commissions and bonuses paid to employees are eligible for the deduction under section 43B. 
• Leave encashment: Any payment made to the employee for unutilised leaves balance can be claimed as a deduction.
• Interest on loans: Interest paid for any loan from Public Financial Institutions, Scheduled Banks, State Financial Corporations or State Industrial Investment Corporations is eligible for a deduction.
• Statutory dues: Any tax, duty, cess, or fee can be claimed on an actual payment basis.
• Indian railway payments: Amount paid to the Indian Railways for using Railways Assets is allowed for deduction.
• Micro or Small Enterprise payments: Any payments made to micro or small enterprises are eligible for a deduction. However, it is allowed only if paid within the time limit specified by the MSMED Act, 2006.

Note that all expenses given below are allowed for deduction only if the payment is made within the timeline specified by their respective Act.

Exceptions Under Section 43B – On an Accrual Basis

The taxpayer can claim deductions only if they follow an accrual system of accounting based on certain conditions:

• If they follow a mercantile system of accounting.
• If all payments are paid on or before the due date for submission of ITR.
• The proof of all payments made must be submitted while filing the ITR.

Points To Note While Claiming Deductions Under Section 43B

• To claim a deduction under Section 43B, the payment must have actually been made and not just accrued for that year. For example, if you, as an employer, announce a bonus for an employee, the bonus must have been cleared before filing the returns to claim the deduction. If the bonus is yet to be paid, it is not eligible for a deduction under Section 43B. 
• The expenses must have been made on or before the due date as per the referred law. For instance, the ESI contribution’s due date is the 15th of every month and therefore, the payments must have been made before that. Payments released after the due date are not eligible for deduction. 
• The payment you make must be a mandate and not optional. For example, if you are paying a bonus to the employee, it must be included in the employment contract. If it is not a part of the contract, the employee is not allowed to claim a deduction. 

Conclusion 

Section 43B is one of the important sections under the Income Tax Act. It helps businesses claim deductions according to the payments they make. Therefore, as a business owner, you must be aware of these laws and make use of them. 

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